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First Quarter 2008
INVESTMENTS, INC.
Notable Quotes…
“My problem lies in reconciling my
gross habits with my net income.” Errol Flynn
“Car sickness is the feeling you get
when the monthly payment is
due.” Author Unknown
“Inflation hasn't ruined everything. A
dime can still be used as a screwdriver.” Quoted in P.S. I Love You,
compiled by H. Jackson Brown, Jr.
“I am opposed to millionaires, but it
would be dangerous to offer me the position.” Mark Twain
“They who are of the opinion that
Money will do everything, may very
well be suspected to do everything for
Money.” George Savile, Complete
Works, 1912
2007 in Review...
What a year it was. Looking back at the roller coaster ride presented
by the 2007 financial markets, one word remains etched in our minds,
“Volatility.” Through the end of November the Dow Jones industrial
average hit a record high 34 times. The roller coaster ride continued
in December and it’s conceivable this type of volatility could continue in 2008.
As investors struggle to gain additional insight into the ebbs and
flows of the market, one question remains. What can we take away
from 2007? This question was posed to a number of successful Wall
Street investors as the year drew to a close:
Dan Foss, Vice Chairman and portfolio manager of Loomis, Sayles &
Co. suggests “the worst thing you can do is get into frequent asset
reallocations, there’s a financial cost going from fund A to fund B.
The more important cost is that it messes up your thinking about what
it is that you want to accomplish with these funds.”
Bill Gross, Chief Investment Officer of Pacific Investment Management Company, talks of his lesson learned from the 2007 credit markets. He indicates “ ‘too securitized to fail’ was exposed for what it
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GS Investments, Inc.
“The real measure of your wealth is
how much you'd be worth if you lost all
your money.” Author Unknown
Largest Stock Holdings
12/31/2007
Securities
"Stocks pull out of a dive."
Pct.
Ishares Trust MSCI EAFE Index Fund
4.11%
Ishares Trust MSCI Emerging Markets Index Fund
2.07%
Apple Computer Incorporated
1.91%
Ishares MSCI PAC Ex-Japan Com Index Fund
1.87%
Proctor and Gamble Company
1.82%
ExxonMobil Corporation
1.82%
PepsiCo Incorporated
1.74%
Microsoft Corporation
1.70%
Cisco Systems Incorporated
1.62%
Altria Group Incorporated
1.60%
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GS Investments, Inc.
First Quarter 2008
(Continued from page 1)
always was, ‘garbage in garbage out.’ Hundreds
of billions in losses await those that took the AAA
Kool-Aid, and a frozen ‘deer in the headlights’
investment community stands by in hopes of central bank salvation. The rate cuts will come but
salvation will dangle tantalizingly out of reach.”
Harry Lange, portfolio manager of the Fidelity
Magellan Fund feels “the key lesson that fund investors should learn from 2007 and apply to 2008
— and beyond — is the importance of portfolio
diversification in a volatile market.” The importance of his contention is evidenced by the variance in S&P 500 Index industry returns, through
November 2007. During this period, returns
ranged from 25.2% for energy to -18.6% for financials.
Peter G. Crane, Publisher and President of Crane
Data, LLC, says “the circumstances change, but
the lessons are almost always the same. ‘Don’t get
greedy and don’t get excited’ are my two favorites
from 2007. His contention is that investors should
ignore market movements and match their investments to their current and future needs.” (Glenn
and I strongly agree.)
Jeremy Siegel, Professor of Finance at the Wharton School of Business reiterates that “a lot of people are scared away when they hear the headlines
of big declines in the market. It’s very important
not to be caught up in the prevailing sentiment,
because usually those are not good times to sell
when the market is going down. In fact, this is
really an illustration of the importance of what we
call dollar-cost-averaging. Basically, you have an
automatic deduction program when you buy $200
of a given security. When the market goes down
the $200 buys you more shares, and when the market goes up, you buy less shares. This is an approach which has been known for years. In these
volatile times, it gains the most.”
Kenneth Heebner, portfolio manager of the CGM
Realty Fund feels that 2007 has uncovered a nice
opportunity for investors in 2008. He contends,
“the principal driver of growth in retail REITs is
the rolling over of five and 10-year-old leases to
substantially higher rent levels reflecting the increase in rental rates over these time periods.”
Heebner also finds industrial REITs attractive. He indicates “we find industrial REITs that focus on activity at Port levels, particularly those with significant
foreign operations, to be very attractive as well.”
...a Preview of 2008
During the New Year holiday, Glenn and I were often
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Tax Tips
Maximize your IRA Contributions In 2007 you can
contribute $4000 to your IRA, or a $5000 "catch up"
contribution if you are age 50 or older.
The choice between contributing to a traditional IRA
or a Roth IRA depends on your situation. We can
help you determine which may be the better choice
for you. Call us if you're not sure. For 2007 the income limits increase for making contributions to a
Roth IRA. For joint filers, contributions phase out if
your income is between $156,000 and $166,000, up
from $150,000 to $160,000 in 2006. For single filers
in 2007, the range has increased to $99,000 to
$114,000. For 2006, it was $95,000 to $110,000.
Charitable Giving Do you donate cash to charity? If
so, you now need a "bank record," such as a canceled
check, or a receipt from the charity in order to deduct
the donation, no matter how small. If you want to deduct your gift, write a check or make sure to get a receipt.
Direct Donations to Charities Consider taking advantage of a tax break scheduled to expire at the end
of 2007. If you're 70½ or older, you can transfer as
much as $100,000 directly from your IRA to a qualified charity without being taxed on that money. The
transfer counts toward your required minimum distribution. This provision also applied in 2006.
Review IRA Beneficiaries Reviewing the beneficiaries of your retirement plans is a good idea if you
haven’t done so in the past. If you have had a change
in your family situation such as a marriage or birth of
a child or grandchild, a review of this situation is a
necessity. Please call us if you need assistance.
Page 3
GS Investments, Inc.
First Quarter 2008
(Continued from page 2)
asked about how we viewed the economy and financial markets for 2008. We feel that 2008 will likely
present us with numerous challenges and subsequent
opportunities when contemplating the investment of
client funds. Specifically, here is what we see for
2008:
Bearish-signals
♦ GDP growth slowing to 1 ½% to 2% .
♦ Job growth slowing to 1.25 million.
♦ Crude oil averaging $78 or higher.
♦ Housing sales falling an additional 10%.
♦ Retail sales slowing to 2.5% growth.
♦ A trade deficit of 3.8% of GDP.
Bullish-signals
♦ A Federal Reserve determined to keep eco-
nomic growth moving forward; the Federal Funds rate, now 4.25%, could possibly decline to 3% in 2008.
♦ The Federal Reserve Board working together with the Administration to solve
the “sub-prime” issue.
♦ Strong per capita, personal income growth,
expected to come in an annual rate of
2.5% for 2008.
♦ Strong employment growth, expected to
remain at a modest 4.7% annually.
♦ Strong corporate balance sheets with the
exception of financial companies.
♦ Election year.
♦ Increased federal spending.
♦ Increased foreign investment in US markets.
♦ A tame core inflation rate.
Our Forecast
Growth in the domestic economy will probably
moderate this year from the 4% rate in 2007. Housing and energy prices will no doubt continue to
negatively influence growth, and it is difficult to
forecast the time when these important areas will
stabilize. However, it is encouraging to see the Federal Reserve step in by lowering interest rates and
providing liquidity for the banking system in order
to avoid a lending shut-down. Inflation remains a
risk, but it may come under control later this year.
Unless unemployment (now at 5%) rises significantly,
consumer spending will continue to support our economy, albeit at a contained rate.
Discretionary consumer spending, on the other hand,
may struggle as consumers react to pressures on disposable income. There is some evidence that business
spending is being constrained, but corporate cash
flows and balance sheets appear to be in good shape
with the exception being the financial sector.
As for account management, we finished 2007 with
strong investment returns in spite of the slight December decline in equity prices. In taxable accounts we
were active toward the end of the year in reducing net
capital gains. Although some accounts had substantial
net capital gains, the good news is most of those gains
will be taxed at the 15% rate. As a result of this activity and the sale of some stocks, account cash positions
were increased.
We have been proceeding cautiously so far in 2008.
One of the areas we are examining is financial stocks.
We have underweighted this area for some time, but
cash dividend returns have jumped to a range of 4%6%+ for some quality names, and there may be longterm opportunities in these stocks. Also we have been
rearranging our healthcare holdings and may find
some new names in this industry sector. In lieu of
bonds we have been buying preferred stocks to gain
high dividend returns. So, we have been picking away
in different areas to gain good investment returns.
One thing to remember is that election years often result in positive stock returns, because there are so
many promises made. One issue we feel strongly
about, however, is that it will be difficult to gain office
if a tax INCREASE is part of the platform. Strapped
consumers may not support a tax bump when energy
and health care costs have been tough on pocketbooks.
Needless to say, we look forward to working with you
in the New Year, and we thank you for your continued
business with GS Investments.
Glenn and John Steinke
Page 4
GS Investments, Inc.
First Quarter 2008
GSI Tenets
Who is GSI?
GS Investments, Inc. is an investment management company
specializing in individual and institutional asset management.
Privately owned and operated, GS Investments, Inc. is run by its
two principals, Glenn H. Steinke, C.F.A., and John G. Steinke,
M.B.A.
Glenn Steinke brings over 45 years of investment management
experience to the business. Previous capacities include Vice
President and Senior Investment Officer with a major pension
fund ($1.8 billion under management) and Senior Vice President
with a major Minneapolis-based financial institution ($3 billion
under management).
John Steinke offers a broad financial services background with
14 years of portfolio management experience and 7 years of
banking experience including capacities as a Vice President of a
$50 million bank and as a private banking officer for a large,
Minneapolis-based financial institution.
GSI Investment Philosophy
"Getting hooked on credit cards."
GS Investments, Inc. utilizes a balanced approach for the majority of its accounts although each account is tailored to the individual needs of each client. Taxable or tax-exempt bonds are
used along with a common stock component. The division between bonds and stocks is determined by the personal objectives
of each client. A need for income and a willingness to assume
risk are also determinants of an account’s bond/stock mix.
GS Investments, Inc. emphasizes the purchase of quality securities and employs a long-term investment style as market timing,
frequent shifts in asset allocation and interest rate forecasting are
not consistent with the firm’s philosophy. In depth market analysis and many years of experience support this approach.
GSI Fixed Income Strategy
GS Investments, Inc. emphasizes a staggered maturity approach
when purchasing bonds. Individual security investment grades
and call protection are considered when making these investments. Quality grades of “A” or higher are favored with taxexempt issues. Government
are Cardss
dominant among taxable
"Hooked onbonds
Credit
securities.
GSI Equity Strategy
INVESTMENTS, INC.
GS Investments, Inc. favors stocks emphasizing quality and
growth. Appropriate cyclical growth stocks and small capitalization growth stocks are used periodically as well. Additionally,
GS Investments, Inc. believes that a growth oriented philosophy
tends to result in less frequent trading and lower tax payments
(for taxable accounts) on realized capital gains. This provides a
lower cost approach for the client.
333 South 7th Street, Suite 3060
Minneapolis, Minnesota 55402
Ph (612) 371-0590 Fax (612) 371-9869
www.gsinvestments.com
[email protected] [email protected]
GS Investments, Inc. emphasizes client communication. Written
investment objectives as well as periodic oral and written reports
are used to heighten the understanding between the client and
investment manager. In addition, easy to read, detailed reporting
is provided by state of the art investment software in order to
inform the client of portfolio progress.
GS
Investments, Inc.